Quiz 6 Examples

# Quiz 6 Examples - Quiz 6 Examples 2013 Example 1 RNAqua Inc...

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Quiz 6 Examples 2013 Example 1. RNAqua, Inc., has patented backward water, OH 2 . The demand curve is a straight line with a vertical intercept of \$190 per gram and a horizontal intercept of 950 grams. The marginal cost of each extra unit is \$10. What is RNAqua’s maximum revenue? RNAqua will set the price at 0.5 x (\$190 + \$10) = \$100, the midpoint between the marginal cost and the vertical intercept of the demand curve. The demand curve is Q = 950 – (950/190)P = 950 – 5P. At P = 100, Q = 450 and profit is (100-10) x 450 = \$40,500. By the way, to illustrate (though not prove) why RNAqua sets the price at \$100, suppose they set it at \$99. Then profit would be \$89 x 455 = \$40,495. Suppose they set it at \$101. Then profit would be \$91 x 445 = \$40,495. Two things to notice: (1) The maximum profit is at P = \$100, by the Battle for Midway rule, and (2) if they miss the optimal price by 1%, that reduces their profit by only one hundredth of 1%, or one part in 10,000. If marginal cost or demand varies slightly, RNAqua may not want to risk

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## This note was uploaded on 02/17/2012 for the course ECO 2013 taught by Professor Denslow during the Fall '05 term at University of Florida.

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Quiz 6 Examples - Quiz 6 Examples 2013 Example 1 RNAqua Inc...

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